Credit Suisse, : Godrej Properties -Limited risk, limited returns

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Credit Suisse, : Godrej Properties -Limited risk, limited returns


● In our new report Dark clouds: Prefer cash flows over leverage,
we initiate coverage of Godrej Properties (GPL) with a NEUTRAL
rating and a target price of Rs581.
● GPL follows a joint development model as a result of which it is
able to acquire land for development in premium locations with
minimal upfront capital requirements. This strategy reduces GPL’s
risk to rising land prices and enables efficient capital utilisation,
however, it also caps returns during economic upswings.
● GPL’s gearing has stayed high in the past (0.87x as on March
2010). We expect gearing levels to rise to 1.0x by March 2012
and decline FY13 onwards. ROEs have been strong in the past,
FY11 average ROE is expected to be lower, at 14%, due to equity
issuance in FY10 but is likely to rebound to 20% (FY12E) and
27% (FY13E).
● Our March 2012 NAV on SOTP basis stands at Rs652 per share,
which includes Rs424 from development assets, Rs107 from
assets intended for lease and another Rs178 from option value in
land MoUs. Our target price (Rs581) is at a 10% discount to its
March 2012E GAV.
Residential exposure across 11 cities
Godrej Properties (GPL) has total land reserves of 79.5 mn sq ft
across 11 cities in which it owns through direct ownership or through
joint development agreements with third parties. Out of the 47.1 mn sq
ft, which pertains to GPL’s share of saleable area, 85% of land
reserves are located in Tier 2 cities with Godrej Garden City project in
Ahmedabad contributing 57%. Demand in Tier 2 cities typically arises
from affordable/value housing segments with pricing in the range of
Rs2,500–3,500 per sq ft.
Asset-light model with faster land monetisation
GPL follows a joint development model as a result of which it is able
to acquire land for development in  premium locations with minimal
upfront capital requirements. This strategy reduces GPL’s risk to rising
land prices and enables efficient capital utilisation. In addition, GPL
also enters into private equity deals at appropriate stages of its
projects which leads to even faster asset monetisation and the
proceeds are utilised to fund new and existing projects


Gearing to remain high, ROEs to improve
Despite having an asset light model, GPL’s gearing has stayed high in
the past (2.2x as on March 2009) and stood at 0.87x as on March 2010.
We expect gearing levels to rise to 1.0x by March 2012 and decline
FY13 onwards. ROEs have been strong in the past, at 28% and 22% in
FY09 and FY10, respectively. FY11E average ROE is expected to be
lower, at 14%, due to equity issuance in FY10 but is likely to rebound to
20% (FY12E) and 27% (FY13E). Operating cash flows after interest
payments and taxes were a negative Rs1.7 bn in FY10 and are
expected to be significantly positive (Rs2.5 bn) in FY13E.


Initiate with NEUTRAL, target price of Rs581
Our March 2012 NAV on a SOTP basis for GPL stands at Rs652 per
share, which includes Rs424 from development assets, Rs107 from
rental assets intended for lease and another Rs178 from the option
value in land MoUs. Our target price (Rs581) is at a 10% discount to
its March 2012E GAV.